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Bad politics can exist with good returns, but investors continue to ignore Russia’s cheap equities, says Jefferies in a bullish note today.

Jefferies notes that Russia’s economic data points all seem to be improving, as evidenced in the performance of financials. It also points to a list of 10 companies with positive sales growth trajectories. Read More>>

Tata Motors has been voted out of the Credit Suisse list of best global investments.

The Credit Suisse investment policy committee removed Tata Motors (TTM), the Indian automaker, and Wolseley (WOSYY), the London-based distributor of plumbing, heating and building materials. Credit Suisse doesn’t explain its rationale, but it’s clearly about upside after a year of big gains for the Indian market.

CS analysts have a price target of 541.2 rupees on Tata Motors, which implies a target of $43.25 for the American Depositary Receipts — just below the current price. (Five ADRs equal one local share of Tata Motors.) Tata stock is up nearly 29% over the past 12 months, and up 4% this year, while Tesla is down 10.6% over the past year, and tumbled 17% year to date. The largest India exchange-traded fund, the iShares MSCI India ETF (INDA) is down1.3% today, and down 2.9% this week. The ETF remains up 4% year to date, and up 20% over the past year.

Credit Suisse does like another automaker. Tesla Motors remains on the global list in the Americas (see list below), with a price target of $290. That implies upside of 56%. Emerging market picks are few, though Mexican bottler Fomento Economico Mexicano or Femsa, which distributes Coca-Cola (KO) and other beverages, made the grade. Here’s who is left on the list, for the Americas region. It is based on analysts “most favored and differentiated ideas.”

It’s not the best of times for emerging market economies, given the downdraft in commodity prices, but the market isn’t properly valuing high-quality stocks with strong cash flows, says Fidelity Investments.

On Monday, emerging markets were not immune to the selloff blamed on the lower price of crude oil. Greece was the worst performer Monday, but oil exporters Russia, Brazil and Mexico also were in the red. Shares of Brazil’s state-controlled refiner and oil producer Petrobras (PBR) and the National Bank of Greece (NBG) fell about 10% apiece, and Sberbank Rossia (SBRCY) was down 3.6%. The Vanguard FTSE Emerging Market ETF (VWO) fell 1.6% Monday.

Corbis

Earth lit by the rising sun.

In a report released January 2, Fidelity portfolio managers Sammy Simnegar and John Carlson, as well as Dirk Hofschire in Fidelity research, write that the emerging-market government debt market opportunities “may become more selective in the year ahead.”

Update: Carlson is a manager of the Fidelity Advisor Emerging Markets fund (FAEMX), a bond strategy with a heavy concentration in sovereign debt. Simnegar is a manager on several Fidelity funds including the Fidelity Emerging Markets FundFEMKX).

As for developing-country stocks:

“Another question for 2015 will be whether emerging-market equities can break a four-year streak of underperformance. On the plus side, emerging-market valuations are cheap, which suggests a lot of the bad news has already been priced in,” says Jurrien Timmer, director of global macro for Fidelity.

“Emerging countries positioned to benefit from structural reforms, such as India, Indonesia, and the Philippines, may be among the performance leaders in 2015. By contrast, countries that still need to undertake these structural reforms, including Brazil, Russia and China, may struggle. Middle-class growth in emerging markets is fueling numerous opportunities in both developed- and developing-market stocks. China now has a greater number of households with disposable income of more than $10,000 than does the United States; India has more such households than does Japan … On the whole, I have a positive outlook for markets in India, Indonesia, the Philippines, Mexico, and Africa, which have above-average growth rates and moderate inflation.
On the other hand, I have a more negative outlook for Russia, Turkey, South Africa, and Brazil, which have low-single-digit GDP growth and mid- to high-single-digit inflation. As far as China goes, while I don’t believe we’ll see a systemic crisis, I expect mid-single-digit GDP growth and a gradual shift from fixed-asset investment to consumption-led GDP growth.
From a sector perspective, my investment approach favors the “three Bs”—companies that benefit from barriers to entry, top brands, and best-in-class growth—which tend to be overrepresented in the consumer staples, consumer discretionary, and industrials sectors, and underrepresented in commodity-dependent sectors such as energy, materials, and utilities.”

Top holdings in the Fidelity Emerging Markets Fund include Samsung Electronics (oo5930.Korea), Taiwan Semiconductor Manufacturing (TSM) and Tencent Holdings (TCEHY). In the energy sector, holdings include the Turkish refiner Turkiye Petrol Rafinerileri (TUPRS.Turkey). Among the fund’s top-25 holdings is a UK-listed diamond mining company, Petra Diamonds (PDL.London and PDMDF), that trades over the counter in the U.S.

Credit Suisse analysts say construction activity in China is beginning to recover, poking holes in some of the most persistent points for China bears. Instead of predictions about a housing bubble about to burst, Credit Suisse says it has believed the country was in the midst of a policy-induced cyclical slowdown, with growth likely to resume later in the year and recent data suggests this is playing out.

Credit Suisse writes:

“A rebound in housing sales over the past few months beginning to flow through to a resurgence in construction activity, which should underpin basic materials demand from that important sector.”

“While Chinese industrial production growth has remained slow (weak exports remain the biggest challenge), the improvement in the real estate sector, surge in infrastructure investment, and continued momentum in the social housing sector suggest that the rate of growth of Chinese basic material demand has troughed, with continued improvement likely over 2013.”

As for the impact on commodities, Credit Suisse writes:

“The importance of the Chinese real estate sector varies considerably within the industrial metals complex. It is most important for steel, accounting for over 20% of global consumption, and quite important for aluminum as well at over 15%. However, it is less crucial for zinc, copper and nickel, where it represents 5-10% of global consumption, and plays virtually no role in lead demand.”

The SPDR S&P China ETF (GXC) is down 0.5% at $62.99 and the Guggenheim China Real Estate ETF(TAO) is up 0.57% at $19.52.

Gonzalo Pangaro, who runs the $6.4 billion T. Rowe Price Emerging Markets Stock Fund (PRMSX), is bracing for a rough period as long as Europe’s crisis remains unresolved. It’s one reason he is borrowing from his 2009 playbook and seeking out companies, with strong management teams and execution, low leverage and an edge against rivals. “You have to be careful because the mediocre to average firms are very expensive,” he says.

That doesn’t mean he is shying away from stocks that have had done well lately. Pangaro says he’s willing to hold on to companies that can navigate a tough economic climate and generate strong growth over the long run. Companies that make the cut include Turkish discount food retailer Bim Birlesik Magazalar (BMBRF), which continues to grow faster than GDP. He also owns Lojas Renner (LREN3.SA), a Brazilian retailer he likens to JC Penney. While Pangaro has been underweight Brazil because the economy has done little over the past 18 months, he says he is beginning to look closely at more opportunities there.

While China is one of the least crowded trades in emerging markets, Pangaro is overweight (in part because it is hated). Valuations have come down notably and Pangaro says that all the market really needs is for the economy to grow at about 7.5 percent—a level he thinks China can achieve. Again, he’s focusing on high-quality firms that are driven more by secular trends than economic growth such as Internet firms Tencent Holdings Ltd. (TCEHY) and Baidu. (BIDU)

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.